What Type of Business Should You Choose For Your Author Business?
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In this episode, I talk about writing as a business. Did you know you created a business when you published your book? I talk about the 4 different types of business you can set up and how they differ. I also talk about how you get paid from each type.
Please note, this information is NOT legal or accounting advice. This is for educational purposes so you can make a better-informed decision about what is right for your business.
Recommended book: Self-Publisher’s Legal Handbook: Updated Guide to Protecting Your Rights and Wallet by Helen Sedwick (Available at your favorite retailer.)
Learn more about Indie Publishing the business of being an author, purchase the book: Business and Accounting for Authors
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If you’d like to support the show, you can donate to buy me a coffee at buymeacoffee/IABG. These donations help support the cost of hosting, editing, and production of the podcast.
Transcript Episode 02
Welcome to the Indie Author Biz Guide Podcast. I’m Tora Moon, genre bending fantasy and sci fi author, indie business author, and entrepreneur. Here we talk about the business of self-publishing, or as I prefer to call it, indie publishing. As an indie author, you have entered the wonderful world of entrepreneurship! On this show, I guide you through the rocky waters of the indie publishing industry.
I share business basics and principles you can apply to your author business, really, any business. Other indie authors share their experiences and expertise to give you insight in your career and build your business. You can download your free Indie Author Business Checklist, find additional resources, and the show notes at Indie Author Biz Guide.com. And now, here’s today’s episode…
Hey fellow Indie Authors! Welcome to this week’s episode of the Indie Author Biz Guide Podcast. In this episode, I talk about writing as a business. Did you know you created a business when you published your book? You did! Llisten to the end for a free resource you can download that can help you in your indie author business.
When you published your book, you created a business. Many times as a new author, all you’re worried about is writing your book and publishing it. You’re not thinking about the ramifications of what comes after that. And what comes after that is: You have now created a business. Whether you’re doing this as a hobby or not, you’ve created a business.
What is a business? Now I like to go to the dictionary so that we can define words that we think that we know what they are. And in the dictionary, it defines business as “a commercial enterprise, usually selling a product, they receive income from their sales, and then current expenses to generate that income.” And that’s exactly what we do when we publish our books and sell them.
We are creating a product, our books, and hopefully, selling those books to generate an income and we incur expenses. Oh, boy, do we incur expenses for publishing our books! We also do the business activities of advertising our books to find new readers or buyers. We hire book cover designers, we hire editors. Sometimes we hire marketing people or other consultants in our businesses and all of that, are business activities.
So, whether you’re doing this as a hobby or if you want to do this full time, when you publish your books, you are a business. It’s a good idea to treat your writing as a business from the very beginning, or as soon as you realize that you have a business. Now you want to make sure that you’re doing those things to treat it as a business and run it as efficiently as possible.
One of the first places to start with treating your writing as a business is thinking about the business structure because your business structure or the form of your business determines how you pay your taxes at the end of the year. And some of the things that you can do and or not do. In the United States, there are four types of business structures. And if you’re listening outside of the United States, three of these you’ll find most likely in whatever country or territory that you live in.
So, the first type of business is a sole proprietorship, also known as a “doing business as,” because to form a sole proprietorship, you register with your state that you as an individual are now doing business as whatever you’ve named your publishing company.
For me, that’s I, Tora Moon, am doing business as Lunar Alchemy Publishing Company. In the UK, this is called a sole trader.
The second type of business is similar to a sole proprietorship, but it’s a partnership. And that means two or more people are doing this as a business. So if you’re writing with a coauthor or with a spouse, then you can’t be a sole proprietorship.
You are now a partnership. And the same as a sole proprietorship, to form a partnership, you file with your state a partnership agreement that you, as this group of people are doing business as XYZ publishing company. One of the things that you really need to consider with a partnership, whether it’s with your spouse, your best friend, or a author buddy create a written partnership agreement.
And this is something that you don’t want to do on your own. This is something you want to talk to a lawyer about. The reason you want a partnership agreement is because it spells out how the income is divvied up. It doesn’t have to be equally. It spells out how taxes are paid. It spells out when the partnership needs money, how that gets input, how each partner, what they are responsible for putting into increase the investment in the partnership.
One of the biggest areas and most important areas in a partnership agreement is what happens when one partner dies or decides they don’t want to be part of the partnership anymore. Because when a partner pulls out, that ends the partnership. So you have to have something in place in your partnership agreement so that when somebody pulls out what happens to that business entity.
Because now if you’ve only had two people and one person pulls out, you are no longer partnership. Part of that is working out ahead of time when you are calm, you are excited about your business, you’re levelheaded. You want to work out what happens when the partnership dissolves and you divvy up the resources and you divvy up the assets, which includes your intellectual property and your money.
You want to do that all ahead of time so that you alleviate any problems when they arise. And that’s one of the reasons why you want to talk to a lawyer, because a lawyer will help you think about all of those different questions that arise later on that you want to address as soon as possible and address when you aren’t in the middle of that problem.
The third type that is also available pretty much wherever you are, is a corporation. In the United Kingdom, that’s called a limited company. And what a corporation or a limited company does is your company is now a separate entity from yourself. A sole proprietorship and a partnership, you are the business, whereas in a corporation or limited company you are separate from your business.
You’ve created a legal entity in and of itself. And now instead of owning the business, you own shares in the business. And in the United States, that’s broken down into two types of corporations that can be what’s called an S corp or a C Corp, which is your regular corp. And the difference between those is how you file your taxes and because of how you file your taxes is it also determines who can be a shareholder in your corporation.
An S-corp cannot be a public. It cannot be publicly held. It generally cannot sell its stock on an exchange. That’s one of the differences between an S corp and a C Corp. An S corp is generally closely held. Only a few people own the corporation’s stock. You can have a C Corp that is closely held and that means they aren’t selling their stock on the public exchanges like New York Exchange. And with an S corp, it’s called a pass through entity in that the S corp only files an information return that says, okay, this is what the business did, and here’s how that’s divvied up among the shareholders. And then the shareholders report their share of the income and expenses on their individual tax returns and because of this, you can’t have another company as a shareholder in S Corp.
And normally if you’re an author, you are not setting up a corporation for your business. You are usually doing a DBA or a partnership.
And the last form in the US is called a limited liability company or LLC. Now this is a hybrid type. It takes aspects of a sole proprietorship or partnership and kind of puts on top a corporation. The limited liability is that you’re trying to give it some of that corporate veil. So if there’s problems that you as an individual aren’t being sued, but it’s suing the limited liability company that you’re limiting your liability. And these can be formed as a single member or a more than one member LLC, which would be a sole proprietorship or partnership or an S Corp LLC. But frankly, I don’t see why you would do that, because if you’re an S-Corp, you have that corporate veil already.
The only difference between an S and a C Corp is how you are taxed and a few other little nuances. For an LLC, the way it is taxed is determined by its underlying structure, and that underlying structure is sole proprietorship, partnership, or s corporation, and that determines how that entity as an LLC is taxed. Under Federal IRS tax laws, they do not recognize an LLC. LLC is don’t exist for federal tax law. You are taxed by what that underlying structure is.
So, what structure or form of business should you choose for your new publishing company?
Now, I have to say this right up front, that this is NOT legal or accounting advice. I am not a lawyer and I am no longer a practicing CPA. This is for educational purposes only. This is to give you information that you can go and talk to your tax accountant or your tax lawyer to help you make a better-informed decision. What is right for your business? Because every business is different, and every person’s situation is different. So what’s right for me may not be right for you.
So you need to take all of that into consideration before making a decision. This is one of the most important decisions that you can make for your business. And while it can be changed later, or it’s usually expensive to do. So, what form you choose really depends on what your goals are for your business and your company and what you want to write and what you want to do within your company.
For most fiction authors, a sole proprietorship or partnership as a DBA is really all you need, and it’s a really good place to start. If you need to later, it can be converted into an LLC or something else.
And now, because I am not a lawyer, I really highly recommend the book by Helen Sedwick, who is a lawyer, Self Publisher’s Legal Handbook: An Updated Guide to Protecting Your Rights and Wallet. And I’ll write all of that out in the show description.
And it’s a good practice to be when you’re doing your taxes with your tax accountant to talk about whether your form of business still fits what you’re doing and your level of income. When your company is making more than 75,000 or 100,000, then you might want to consider whether you need to do an LLC or not at that point or other things you can do to help mitigate your taxes.
Now, if you’re writing nonfiction many times your nonfiction writing is part of your business that you have already. It’s an additional stream of revenue. In that case, then whatever form of business that you have, you’re going to use that. Those considerations for your nonfiction business, your consulting practice that has different considerations than if you’re just writing a fiction book. Or maybe you are just writing nonfiction, you’re just sharing your experiences and expertise. And then that’s another thing to consider, what are you doing with your writing and what form that you really need for your taxes and for your legal protection?
The main differences between the types and this applies to U.S. companies, as I haven’t done taxes in other countries and I don’t know the laws, so please check with a tax accountant in your locality. And I say tax accountant rather than financial accountant because those are different.
Tax accountants are up on all of the tax laws. They do taxes all the time. Whereas a financial accountant like what I was, I didn’t do taxes very much. Rarely if the last 12-15 years of my accounting career, the only taxes I did were my own. So I knew the financial aspects, but when it came to taxes, it would be talking to an accountant who specialized in taxes. Totally different thing. Yeah, I know, like if you write historical fiction, it’s different than writing a fantasy.
So the main differences between the types of businesses is, one, how they are taxed, how you get paid by them, and the cost of maintaining.
So how the business is taxed, whether you’re a sole proprietorship, partnership or an S-Corp is that it’s taxed at the individual level.
So when you have a DBA or a sole proprietorship, you will file your taxes on what’s called a Schedule C, on your income taxes, on your personal income taxes. Sometimes you’ll hear a sole proprietorship or DBA called a Schedule C business, and that’s where it comes from. It’s because you’re reporting your business income and expenses on a Schedule C, on your Form 1040.
LLC will pay its taxes on whatever form it is that LLC will file an information return.So will an S corp or partnership. They will file an information return with the IRS, which says this is what the business did and here’s how it’s broken out with each of the partners or shareholders. And the shareholders or partners will get what’s called a Schedule K-1. And that’s what they use to report on their individual tax returns, their portion of the in at the partnership or s corp’s taxes.
And how you pay your taxes directly affects how you get paid from the business.
For a sole proprietorship and a partnership, you own the business. You are the business. So any of the assets of the business are yours. Any of the liabilities of the business are yours. To get paid from your business, you simply withdraw some of the assets of the business and put it into your personal account. It’s called a withdrawal, either an owner withdrawal or a partner withdrawal.
And what that does is that when you withdraw money from the business, you’re decreasing your equity in that business. Same as when the business needs money and you put money into the business, then you are increasing your equity in that business. So, you don’t get a paycheck. You can not get a paycheck from your sole proprietor business. You can have employees, and they get paychecks. But you as the owner cannot have a paycheck.
In partnerships, a managing partner may get a paycheck. And this is one of those things that you need to talk to your tax accountant about because there are very precise things that you have to follow in order for that to happen.
If you are an S corp, then you must take a pay check.The rules for an S-Corp say that the major shareholders and the managing shareholders of an S-corp must be paid. You are allowed for the first year to not be paid. After that you must have a paycheck and have payroll taxes withheld.
Now, if you’re a C Corp, you are an employee of the business, you are a shareholder. You don’t own the business unless you own 100% of the shares. But even then, because you’ve created a corporation which is a separate entity from yourself, then you are an employee of that corporation and so you can pay yourself.
And an LLC the rules for paying yourself also follow how you get taxed, it’s the underlying structure of that LLC.
And the third difference between the forms is the cost of maintaining. Your registration fees for a sole proprietorship or partnership are usually pretty low. As far as I know and that I’m aware, most states it’s under $100 to register. When had to re-register my DBA in Utah, for instance, it only cost me $18. And because I’m taxed personally on it, there are no minimum taxes to a DBA or a partnership.
However, for corporations and LLCs, most states have a minimum tax that no matter how much you have in your profits or if you’ve had a loss, you owe a minimum franchise tax. A minimum tax for being franchised to have a business. In Utah that’s $100. In California, it’s $800. So that’s another consideration.
Also, as part of an S- corp or an LLC, there is the cost to maintaining your records for these types of companies. You must have board minutes and written board minutes. You must have board meetings, even if you’re only one shareholder. You must have corporate resolutions. You must have a resolution of, I’m going to bank at XYZ Bank. In fact, if you are a s corp or an LLC, you have to have that corporate resolution before the bank will open up your bank account. That’s giving the corporation has given you the authority and authorization to open up that bank account. You have to have shareholder meetings, at least an annual shareholder meeting with a vote for as president, even if you only have one shareholder. So you have that cost of maintaining those records, whereas you don’t have that as a sole proprietorship or partnership.
And like I mentioned before, getting paid S Corp’s must have you as an employee so you have the additional cost of paying payroll taxes. And a lot of times what you’re going to do is pay a company to manage your payroll. This is one area where, yes, you want to hire that out and not do it yourself. You want a professional to do it because you don’t want to get in trouble.
Payroll taxes are not bankruptable. So if you don’t pay your payroll taxes, which includes your individual payroll taxes in your corporation, then if you decide later and declare bankruptcy, any payroll taxes that you owe, you’ll still owe. That’s something to consider when you’re deciding what form of business to do.
So there’s many things to consider about what form of business your author publishing company is going to take.
And like I said at the beginning, it’s much easier and less costly to make that decision at the very beginning. Even before you’ve published your first book. So while you’re in that place of getting your book edited and getting your covers made for it, this is a step to be taking while that’s being done before you’ve even published. What business format am I going to establish my publishing company?
And if you’ve already published your books, by default, you are a sole proprietorship or partnership. You can be publishing your book as, Tora Moon. However, it’s better and more professional and it’s part of your business mindset to set that up as a publishing company.
Later, when you’ve got several books out and you’re approaching a bookstore, an independent bookstore, to carry your books, if you are treating your publishing company as a company and as a business, they’re more likely to have confidence in you. So if they say so, who who’s the publisher of these books? Instead of say, Oh, I’m the publisher, you can say Lunar Alchemy Publishing is the publisher. They don’t have to know. It’s a DBA and it’s you publishing your own book. You have a publishing company that’s publishing your books. And because you’re thinking about you are a publisher publishing your books, that just sets that subconscious mindset that I’m doing everything that a small press publisher would do or a traditional publisher. I am publishing my books to the highest quality and standard that I can.
For a more in-depth discussion on the different business structures and how you get paid from them, I highly suggest you get my book, Business and Accounting for Authors. It’s available on my website in e-book, print ,or audiobook formats, or if you must, it’s on the major retailer sites. Or you can order it from your library.
As a reminder, you can download your free business checklist to help you determine what you’ve already set up and done for your business and what you may want to examine and add. Give yourself the gift of taking the steps to ensure the foundations of success in your author business are firmly set. Get your Indie Author Business Checklist today. Go to IndieAuthorBizGuide.com/bizchecklist, and that’s B-I-Z checklist.
Thanks for listening to this episode of the Indie Author Biz Guide podcast. I hope you found value in it. You can get your free business checklist, find more information, and any downloads mentioned at IndieAuthorBizGuide.com/podcast. Please like and subscribe and tell your indie author friends about the show.
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